Why Does the Middle Class Hate Stocks?

“If you’re investing for a lifetime – and you should be, saving for retirement and educating your kids along the way – if you’re 20 years old now, you should be thinking 60 or 65 years as your time horizon.” – John Bogle

This week’s edition of scary retirement statisticscomes from aWells Fargo survey of middle-income earners to get their take on retirement and investing issues.

Here are the grim results:

Thirty seven percent of respondents said they planned to work until they die. So they’re not even planning on retiring ever. Thirty four percent say 80 is their new retirement age.

Fifty nine percent of these people said paying day-to-day bills is their top financial concern. Only 30% have a retirement plan in place.

And the craziest statistic is that 75% said they aren’t confident that the stock market is a good place to invest. Even worse, 80% of those in their 20s said they aren’t confident investing in stocks.

I was shocked by these numbers, especially since stocks have had one of their best runs in history over the past five years. A sub par economic recovery has masked this performance for many.

So this is quite the conundrum. People aren’t confident that they can retire, maybe ever. But they’re terrified of investing in stocks, which is the only way they are ever going to be able grow their wealth enough to retire.

So why do people hate stocks so much?

I’m sure it has something to do with our recent experiences with large losses. There are many behavioral biases at work here (the recency effect, loss aversion, the availability heuristic, the gambler’s fallacy, hindsight bias, etc.).

It seems that everyone has a personal story of a friend or family member that has lost money in the stock market.

The problems only get compounded when they give up after large losses and sell at the bottom, vowing to never return to the wicked markets which are rigged, unfair, run like a casino and many other forms of blame that get heaped on everyone but themselves.

As Jason Zweig described in Your Money & Your Brain, financial losses are processed in the same area of the brain that responds to mortal danger. And it is literally true that we can relive our financial losses in our sleep. Losing money hurts.

The combination of past losses, a lack of financial literacy and our behavioral biases means that most experiences with the stock market end in pain for most individual investors.

It’s unfortunate that it has come to this. By saving and investing in a diversified portfolio over a long time horizon these people could drastically improve their odds of achieving financial freedom some day.

So here are the facts that that the people in this survey need to understand:

Stocks are your best route to building wealth over the long term. The long term is defined by multiple decades; not tomorrow, not next week, not next month. They aren’t always a great buy but history shows they are your best bet over multi-decade time frames.

Pick any 20 year period of stock market returns throughout history. Start on any day. You will not find a loss at the end of 20 years. It’s never happened. There were many losses along the way to get there, but stocks go down over shorter periods.

From 1928 to 2012, the average annual return over 40 year periods on the S&P 500 was 10.8%. That kind of return doubles your money roughly every 7 years. The low was 8.5% per year and the high was 12.5% a year. Imagine those kinds of returns compounding over 40 years, even with smaller amounts of money.

This time frame included wars, natural disasters, recessions, market crashes, the Great Depression and much more. Yet businesses continued to earn profits and progress grew exponentially.

Rolling 30 year periods averaged 10.8% a year. Rolling 20 year returns were 11.2% and rolling 10 year returns averaged 10.4%. The shorter your time frame, the greater variation of returns, which is why you must always think and act long-term instead of making short-term decisions based on fear and greed.

Let’s say returns come in much lower than this going forward, call it 7% per year to be conservative. Your money will still double in value every 10 years or so (divide your return by 72 to figure out how long it will take your money to double).

Seventy-five bucks a month at 7% a year turns into over $284,000 over 45 years of saving. Make it two hundred a month and that’s over $750,000.

Still plan on retiring at 80 even though you’re only in your 20s right now? Great, start saving now and you can let your money build for 50 or 60 years.

Now go talk about it.

What's been said:

I knew that it would be a pitiful number, but I didn’t know that it actually would be that horrible. I knew people around me not interested in investing, panicking with every small move and staying with savings accounts.
It is all a terrible failure of education.
Recently I wrote an article about investing in Australia. Since I live and invest in the US I had to do a little research to find out how it works down there. I was shocked, what barriers people have in Australia to invest there and how easy we have it here and yet people fail. The sad thing is, many of those in their 20s now will turn into those government dependents later blaming capitalism for their own failure.

That’s interesting that there are the barriers to invest in Australia. Didn’t know that. Although they do have the forced saving program down there so maybe it’s not as much of an issue.

I agree more people need to take responsibility and save on their own. Unfortunately, people get overwhelmed and there are a lot of people that give bad advice and it’s tough to know who to trust. Self education is probably the best route.

Perhaps it has nothing to do with your supposed fear of the stock market and growing animosity of it. You bask in your earnings, blinded by recent returns to the point where you cannot even see how much hatred is mounting in the WORKING class who, invested through a 401K or not, hate… no, despise the wage and labor killing tactics used by Big Corp., Inc. and the multinationals to bring about your returns. Meanwhile political cronyism among the elite is used to pass legislation to insure your risk free income. Go ahead, tell us all about how hard you labored and how you “earned it” smart guy. Reality is your heads to far in the damn clouds to comprehend the truth which is far more ominous and much more dangerous than you will comprehend until it it’s too late. Anger at the investment, no work, zero productivity class is growing exponentially. All you need worry about is the next rounds of reported layoffs. Not because of how it will increase your portfolio but how fast it may accelerate the old art of denunciation, bringing guillotines to the door step of all the “hard workers” on Wall St. who produce fucking zero yet bask in self assigned glory as some kind of fucking financial international saviors. Meanwhile many of us recognize how much blood the stones have left for your precious, labor free, returns. Now you don’t have to presume it is fear of losses creating “hate” for Wall St. Now you have truth, dismiss and deny it as you will. Look to your balance sheet for comfort. Wake the fuck up adding machine boy, your beloved portfolio does not come without costs to others.

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BEN CARLSON, CFA

A Wealth of Common Sense is a blog that focuses on wealth management, investments, financial markets and investor psychology. I manage portfolios for institutions and individuals at Ritholtz Wealth Management. More about me here.

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